chapter four

Question 1

Six Main Drivers of SC Performance

Answer 1

1. Facilities
   The physical locations in the supply chain network where product is stored,
   assembled, or fabricated
2. Inventory
   All raw materials, work in process, and finished goods within a supply chain
3. Transportation
   Moving inventory from point to point in the supply chain
4. Information
   Data and analysis concerning facilities, inventory, transportation, costs, prices, and
   customers throughout the supply chain
5. Sourcing
   Who will perform a particular supply chain activity
6. Pricing
   How much a firm will charge for the goods and services that it makes available in the
   supply chain

Question 2

1. Facilities: Components of Facilities Decisions

Answer 2

 Role:
• Flexible, dedicated, or a combination of the two
• Product focus or a functional focus
 Location
• Where a company will locate its facilities
• Centralize for economies of scale, decentralize for responsiveness
• Consider macroeconomic factors, quality of workers, cost of workers and
facility, availability of infrastructure, proximity to customers, location of other
facilities, tax effects
 Capacity
• A facility’s capacity to perform its intended function or functions
• Excess capacity – responsive, costly
• Little excess capacity – more efficient, less responsive

Question 3

Facility related metrics

Answer 3

Capacity
Utilization
Production cost per unit
Theoretical flow/cycle time 
Flow time efficiency
Product variety
Processing/setup/down/idle time
Quality losses
Average production barch size
Production service level

Question 4

2. Inventory: Components of Inventory Decisions

Answer 4

 Cycle inventory
• Average amount of inventory used to satisfy demand between supplier
shipments
• Function of lot size decisions
 Safety inventory
• Inventory held in case demand exceeds expectations
• Costs of carrying too much inventory versus cost of losing sales
 Seasonal inventory
• Inventory built up to counter predictable variability in demand
• Cost of carrying additional inventory versus cost of flexible production
 Level of product availability
• The fraction of demand that is served on time from product held in inventory
• Trade off between customer service and cost

Question 5

Inventory-related metrics

Answer 5

Cash to Cash cycle time
Average inventory
Inventory turns
Products with more than a specified number of days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate (orders met on time from inventory)
Fraction of time our of stock
Obsolete inventory

Question 6

3. Transportation: Components of Transp. Decisions

Answer 6

 Design of transportation network
• Modes, locations, and routes
• Direct or with intermediate consolidation points
• One or multiple supply or demand points in a single run
 Choice of transportation mode
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping, and flexibility

Question 7

Transportation-related metrics

Answer 7

Average inbound/outbound transportation cost
Average incoming/outbound shipment size
Average inbound/outbound transportation cost per shiphment
Fraction transported by mode

Question 8

4. Information: Components of Information Decisions

Answer 8

 Push versus Pull
• Different information requirements and uses
 Coordination and information sharing
• Supply chain coordination, all stages of a supply chain work toward the
objective of maximizing total supply chain profitability based on shared
information
 Sales and operations planning (S&OP)
• The process of creating an overall supply plan (production and inventories) to
meet the anticipated level of demand (sales)

Question 9

Information-related metrics

Answer 9

Forecast horizone
frequency of update
forecast error
seasonal factors
variance from plan

Question 10

5. Sourcing: Components of Sourcing Decisions

Answer 10

 In-house or outsource
• Perform a task in-house or outsource it to a third party
• Outsource if it raises the supply chain surplus more than the firm can on its
own
• Keep function in-house if the third party cannot increase the supply chain
surplus or if the outsourcing risk is significant
 Supplier selection
• Number of suppliers, criteria for evaluation and selection
 Procurement
• Obtain goods and service within a supply chain
• Goal is to increase supply chain surplus

Question 11

Sourcing-related metrics

Answer 11

Days payable outstanding
Average purchase price
Range of purchase price
Average purchase quantity
Fraction of on time delivieries
supply quality
supply lead time
supplier reliability

Question 12

6. Pricing: Components of Pricing Decisions

Answer 12

 Pricing and economies of scale
• The provider of the activity must decide how to price it appropriately to reflect
economies of scale
 Everyday low pricing versus high-low pricing
• Different pricing strategies lead to different demand profiles that the supply
chain must serve
 Fixed price versus menu pricing
• If marginal supply chain costs or the value to the customer vary significantly
along some attribute, it is often effective to have a pricing menu
• Can lead to customer behavior that has a negative impact on profits

Question 13

Pricing-related metrics

Answer 13

Profit margin
Days sales outstanding (when cash is collected)
Incremental ficed cost per order
Incremental variabe cost per unit
Average sale price
Average order size
Range of sale price
Range of periodic sales